off-balance-sheet debt - Investment & Finance Definition

Debt that is owed by a company, but because of
alternative accounting or financing techniques, is not included on a company’s
balance sheet. Investors need to read through the fine print in the footnotes
of a company’s financial statements to find this debt. One type of
off-balance-sheet debt that a company typically has is a lease for property or
equipment that commits the company to a fixed-payment schedule for a multiyear
period. Because the payment schedule is fixed, it isn’t much different than
having a bank loan. While a capital lease (a long-term lease) is likely to be
reported on a company’s balance sheet, an operating lease is generally only
disclosed in a footnote.

Another example is when companies sell
accounts receivables or credit card receivables through securitization
(packaging debt into a group and then issuing new securities that are backed by
the income from the pool). These transactions may be reported in the footnotes
of a company, however they aren’t on the balance sheet as debt. They are more
like debt because in many instances the companies remain liable if a borrower
or customer defaults on payment. However, if the company has actually
transferred the risk associated with owning them, and there is no danger that
they will have to make the payment if the borrower defaults, then they really
aren’t a debt of the company. Details of these types of obligations are found
in a company’s financial statements, usually its form 10-K, which is filed
annually with the SEC.